Strategic thinking when entering aged care
We recently published an article on our website (link here) which identified the rule changes that came into effect 1st January 2016. In essence residents who entered a residential aged care facility after this date will have rental income from their former home assessed for the aged care means test. The impact of this for residents is that in general, the cost of their care is increased through a higher Means Tested Amount and in many cases the result is a negative net cash flow.
As a result, we are often asked how we assist people minimise the impact of this legislative change.
In this article we explore the options available.
- Reducing the amount of deemed financial assets
Where the Age Pension entitlement is determined under the Income Test, reducing the amount of deemed financial assets can help reduce the Centrelink assessable income and therefore improve cash flow.
Importantly, Refundable Accommodation Deposits (RADs) produce no assessable income and are exempt for Age Pension entitlement purposes. So if the resident has been disadvantaged through the removal of the 1/1/2016 rental exemption and they have other assets, these can be liquidated to partially offset the increase in assessable income. It follows that this will reduce the means-tested care fee.
By liquidating an asset that generates less than the Maximum Permissible Interest Rate (MPIR), savings can be generated. As a guide, if a $100,000 term deposit earns 3%pa and the capital was instead paid towards lowering a RAD. The loss of income would be $3,000, but the reduction in the Daily Accommodation Payment (DAP) would be 6.28%pa[1] x $100,000 = $6,280pa. The difference of $3,280 represents an improvement in cash flow and demonstrates a strategic way to replace an assessable asset with an exempt asset. The flow-on effect may be a greater pension entitlement.
- Pay the Daily Accommodation Payment (DAP) from the Refundable Accommodation Deposit (RAD)
Where part of the accommodation payment has been paid via a RAD, ask the residential care facility to deduct the DAP from the RAD to help improve cash flow.
This is like the residential care version of a reverse mortgage, with the key difference being the Maximum Permissible Interest Rate (MPIR) is locked in at the point of entry. So there is a form of ‘insulation’ against future rising interest rates. The interest and DAP is essentially capitalised, so the RAD would decay at an increasing rate and this would need to be taken into account from an estate planning perspective.
- Financial assistance from relatives
There are cases where the resident is unable or unwilling to liquidate assets in order to partially pay a RAD. In some instances family members may be able to provide assistance so that the home can be retained and / or the residential care facility place maintained.
Primarily Aged Care should be about the dignity of our loved ones, not finance and it is an often overlooked strategy to call on the adult children of the aged care recipient to help.
To ensure estate equalisation it is important to identify the impact of this assistance over time in the terms of the Will.
- Sale of the family home
We recognise that there are a number of reasons why residents may want to retain their family home, however to ensure a level of dignity without a degree of financial stress in the later years of life also delivers immeasurable value. Often it is also the best strategy from a financial planning perspective too.
Depending on the home’s value, a sale will put a resident in a position to:
- Settle the full RAD.
- Have capital left over to invest and meet future needs.
- Have a positive cash flow year on year.
- Be able to develop or re-draft their estate plan with a level of certainty.
Importantly in this scenario there is no more having to deal with agents, tenants, and the seemingly endless costs associated with maintaining a property or being a landlord. As well the impact of the new regulations is mitigated as, by definition, there is no longer a rental income being received.
Conclusion
On the surface the new regulations appear particularly harsh for post 1 January 2016 residents, but with some strategic thinking and by using the regulations to advantage, there are ways in which the financial impact can be reduced or offset.
Lex Goldsmith | Principal Edge Financial Services | Senior Analyst | Accredited Aged Care Professional
[1] MPIR Rate effective 1/4/2016.
